ECRI's Lakshman Achuthan Defends their Recession Call

July 30 (Bloomberg) -- Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, talks about the U.S. economy. Achuthan speaks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." (Source: Bloomberg)
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Highlights:

• Job losses for 35 to 54 year olds are approaching one million jobs lost since this "recovery" began.  This is where you make and spend the most money and is at the core to what is wrong. 
• If you are doing well, then in the recent economy you are doing very well.  If you are near Wall Street, then "it is good to be close to the helicopters which are spewing cash."
• The Fed would "not have four years of zero interest rate policy and quantitative easing forever and Q-ternity if everything was OK."
• "We believe a recession began last year."
• "Sometimes it takes up to two years" for final GDP revisions which can be large.
• Past downward revisions to GDP were 2 to 4 percentage points lower after the last few recessions.
• The Fed is using "trickle down theory" of the "wealth effect" hoping higher stock and housing prices will stimulate the economy.
• The pace of growth in home prices will decelerate. 
• The current GDP data shows US growth is lower now than in Japan during their "lost decades."

Feel free to add any items I missed or you think is important in the comments.

Facebook Group "Investing for the Long Term"

Is the Recession In Its Second Year Now?

The people at "Chart of the Day" yesterday wrote:

Today, the US government reported that gross domestic product (total output of goods and services) contracted at an annualized rate of 0.3% in Q3 2008. The GDP report showed that consumer spending (about 70% of the US economy) declined 3.1% during the quarter which is the biggest decline since 1980. For some perspective on the US economy, today's chart illustrates the ECRI Coincident Index. This index is a composite of several economic indicators (includes measures of production, employment, income and sales) that provide an indication as to the current state of the US economy. Since 1950, the ECRI Coincident Index has (on average) peaked one month before the beginning of a recession (as measured by the NBER – the official arbiter of recessions) and troughed at the same time that a recession ended. Today's chart illustrates that the ECRI Coincident Index peaked back in September 2007. This suggests that the US economy has been in recession since Q4 2007 and that the recession is ongoing.

Courtesy of "Chart of the Day"

Based on data like new jobs, production, income and sales the US economy has been "recession like" for about a year. The chart below clearly shows the surge in GDP from the fiscal stimulus package ($300 to $600 tax rebate to taxpayers) attempted to push the economy out of a recession but it was too little, too late to keep GDP growth from going negative. See:

• January 25, 2008: "ECRI Says There Is A Window of Opportunity for the US Economy"
  
  
• March 28, 2008: ECRI Calls it "A Recession of Choice"

Economists now think Q4 2008 GDP growth will be between negative 5% and negative 0.1%. That would make for two consecutive quarters of negative GDP growth, the layman's definition of a recession. More importantly, it would give us negative GDP growth for three of the last five quarters that all showed a decline in jobs growth and plunging ECRI WLI.

Lets hope the US Stock market rebound since its recent low is acting as a leading indicator . It may be predicting another stimulus package will come after the election and it could go even higher after the uncertainty over the election is gone next Wednesday and the efforts by the US Treasury and Federal Reserve restore liquidity to the credit markets.

Q2 2008 PCE, GDP and Jobs All Better Than Expected

The Q2-2008 PCE (Personal consumption expenditures) price index remains high and was unchanged at up 4.2%.

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Oil and food prices are down now so headline inflation should be lower in future quarters if oil and food remain

Led by strong exports, Q2 Real gross domestic product (GDP) was revised up to 3.3% from 1.9%. Report excerpts:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.3 percent in the second quarter of 2008, (that is, from the first quarter to the second quarter), according to preliminary estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 1.9 percent (see "Revisions" on page 3).

The increase in real GDP in the second quarter primarily reflected positive contributions from exports, personal consumption expenditures (PCE), federal government spending, nonresidential structures, and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased

Real exports of goods and services increased 13.2 percent in the second quarter, compared with an increase of 5.1 percent in the first.

Real imports of goods and services decreased 7.6 percent, compared with a decrease of 0.8 percent.

Kirk: The weak dollar led to lower imports and higher exports. A weak economy also leads to lower imports. Since what we imported fell by 7.6%, then 7.6% is added to GDP. Had Q2 imports remained flat, GDP would have been 7.6% lower or negative 4.0%!

To find out how I've profited greatly from these difficult market conditions, subscribe to "Kirk Lindstrom's Investment Newsletter" today! Subscribe NOW and get the August 2008 issue for FREE!

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports, an acceleration in exports, an acceleration in PCE, a smaller decrease in residential fixed investment, and an upturn in state and local government spending that were partly offset by a larger decrease in inventory investment."

Jobless claims for the week ended 8/23 fell 10,000 to 425,000.

The 4-week moving average of jobless claims fell 6,000 to 440,250

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• Since 1/1/1999 through 7/31/08 my "explore" portfolio is up 180% while the S&P500 is only up 19% and Warren Buffett's Berkshire Hathaway is only up 62%
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More at

==>US Inflation Data - August 2008 Release Summary <==

Next release - September 26, 2008 at 8:30 A.M. EDT for Second Quarter 2008 (Final) Gross Domestic Product

ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation

Friday's jobs report has many worried that the US economy is falling into or has already entered a recession. Rex Nuting of CBS Marketwatch reported:

Last update: 8:30 a.m. EST Jan. 4, 2008
WASHINGTON (MarketWatch) - The unemployment rate shot up to 5% in December as job growth stalled, a sign that the U.S. economic slump has spread to the labor market. U.S. seasonally adjusted nonfarm payrolls rose by 18,000 in December, the weakest job growth since August 2003, according to a survey of thousands of businesses. Job growth was revised up by a total of 10,000 in November and October. Economists were expecting payrolls to increase about 58,000 in December. Private-sector payrolls fell by 13,000, the biggest decline in more than four years. A separate survey of households showed employment plunging by 436,000, marking the biggest decline in five years. The number of unemployed adults rose by 474,000, pushing the unemployment rate up to 5.0% from 4.7%.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index (WLI) inched up to to 135.1 in the week of Dec. 28 from 135.0 in the prior week, revised from 135.2. The plunge in the growth rate of the WLI to -6.2% is the lowest reading since Nov. 16, 2001, when it hit negative 7.1% according to ECRI.

The positive effect of higher industrial commodity prices and lower jobless claims was almost fully offset by weaker housing activity, said Lakshman Achuthan, managing director at ECRI.

"WLI growth is now at its worst reading since the 2001 recession. However, the WLI's recent decline is not based on pervasive weakness among its components, suggesting that a recession could still be averted," Achuthan said.

ECRI's US Future Inflation Gauge (US-FIG), an index designed to anticipate cyclical turning points in inflatinon, also fell in its latest reading. This decline in the US-FIG means the Federal Reserve has plenty of room to cut 50 basis points or even more since inflation pressures are still in a cyclical decline.

Fri, Jan 4 2008, 14:40 GMT
ECRI US Inflation Gauge 117.1 In Dec Vs 119.8 In Nov

NEW YORK (Dow Jones)--An index designed to anticipate cyclical turning points in inflation fell close to a three-year low in December, to 117.1 from 119.8 in November, the Economic Cycle Research Institute said Friday.

The smoothed annualized growth rate of the index also dropped heavily, to -4.6% in December from -0.7% the previous month.

"With the [index] falling to a 31-month low, inflation pressures should not be a serious concern," ECRI Managing Director Lakshman Achuthan noted in a press release.

In this video from Fox Business Network, ECRI managing director, Lakshman Achuthan, spoke with Stuart Varney and Dagen McDowell following Friday's weak jobs report. Topics included the state of the business cycle and prospects for Fed interest rate cuts going forward.



My take on the data is we can still avoid an "official recession" as defined as two consecutive quarters of negative GDP growth if the Fed acts quickly to cut rates, probably 50 basis points or more by the next meeting, and continue to cut rates until either ECRI's WLI turns up and continues up for many weeks OR the US-FIG makes an about face and enters a period of cyclical inflation.

Come ask questions of ECRI Managing Director Lakshman Achuthan in our Investing for the long term facebook discussion forum called "ECRI Data (Economic Cycle Research Institute)"

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US Economy Gains 110,000 Jobs in September 2007

U.S. job growth rebounds. 110,000 new jobs were created by the US economy in September

(5:30AM PST) August was revised from a loss of 4,000 jobs a gain of 89,000 new jobs, mostly in government.

This better than expected jobs report could tip the scales away from "recession fears" back to "fear of inflation" as the markets obsess over needing something to worry about

U.S. Sept. job growth seen in health care, food services
U.S. Sept. household employment rises 463,000, most in 2 yrs
U.S. payrolls annual benchmark revision down 297,000
U.S. Sept. public teacher hiring rises 46,000
U.S. Sept. average hourly earnings up 0.4%
U.S. Sept. private-sector payrolls rise 73,000
U.S. Sept. unemployment rate 4.7% as expected
=> 4.7% Unemployment rate was the highest in a year.
U.S. July, Aug. payrolls revised up 118,000
U.S. Sept. nonfarm payrolls up 110,000 vs. 113,000 expected

DJIA

Click Graph to View Full Sized

Treasuries plunged after jobs report; 10-yr yield up to 4.597%
S&P 500 futures rise 10.40 points to 1,563.00
Dow industrial futures up 69 points at 14,110
Dollar rallies after jobs report; euro down 0.5% at $1.4061
Crude futures drop 39 cents at $81.05

Unemployment Rate Chart from BLS

(Series Id: LNS14000000 Seasonal Adjusted)

© Kirk Lindstrom

Chart of Stock Markets vs Fed Funds Rate

Click chart to see it full sized

The Federal Reserve cut its Fed Funds interst rate today from 5.25% to 4.75% and they cut their discount rate to from 5.75% to 5.25%. Below is the text of their statement explaining their actions.

Release Date: September 18, 2007

• For immediate release
  .
  The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
  .
  Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
  .
  Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
  .
  Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
  .
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
  .
  In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

Kirk's Comments: I view this is positive as the Fed is taking action to help the credit markets and it has returned its bias to "neutral." What this all means to the stock markets is discussed in my October newsletter I am writing now and hope to release by the weekend. Subscribe now and get my list of stocks I think will benefit from today's action.

Sept 7th Jobs Report & ECRI's WLI & FIG

The poor jobs report, WLI at a 43-week low and ECRI's FIG at a 27-month low should make it a "no-brainer" for the Federal Reserve to cut interest rates at its September 18th meeting, if not before then.

ECRI's WLI:

• 7-September-2007 The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index (WLI) edged up to 140.4 in the week ended Aug. 31 from 139.2 in the prior week. ECRI said the annualized growth rate in the index declined to 0.6 percent from 1.3 percent in the prior week. It marked the smallest growth level since the week ending Nov. 3, 2006.
  
• "With WLI growth at a 43-week low economic growth prospects have clearly dimmed, but not yet in a recessionary way," said Lakshman Achuthan, managing director at ECRI.

USFIG - ECRI's U.S. Future Inflation Gauge:

• 7-September-2007: U.S. inflationary pressures fell to a 27-month low in August largely owing to disinflationary trends in commodity prices, jobs, loans and interest rates. ECRI's U.S. Future Inflation Gauge (USFIG), designed to anticipate cyclical swings in the rate of inflation, fell to 116.8 in August from 119.5 in July, upwardly revised from 119.3.
  
• "With the USFIG at a 27-month low, underlying inflation pressures continue to ebb," said Lakshman Achuthan, managing director at ECRI. "With respect to the inflation outlook, this gives policy makers additional leeway to lower interest rates."
  
• "The (USFIG) gauge was pulled down in August mainly by disinflationary moves in measures of jobs, loans, commodity prices, vendor performance and interest rates," a statement from ECRI said.
  
• The USFIG's annualized growth rate, which smooths out monthly fluctuations, dropped to minus 5.1 percent from minus 1.4 in July, revised from negative 1.7.

JOBS Report:

• 7-September-2007: August saw the first decline in jobs since August 2003. The Labor Department said August nonfarm payrolls fell by an estimated 4,000 while the unemployment rate held steady at 4.6%. Wall Street economists on average had expected 115,000 more jobs, not a loss of 4,000. Read the full BLS report.

I'll post charts of WLI and FIG here as soon as I figure out how to upload them from my hard drive.